The media room at the Theodore Levin U.S. Courthouse in Detroit was crowded Wednesday as Bankruptcy Judge Steven Rhodes heard arguments about whether the city may treat its unlimited-tax, general obligation bonds as unsecured during the bankruptcy process. At issues is hundreds of millions of dollars the city could use for services for residents instead of paying interest to bond financiers, to put it simply. But wiping away the debt, if that occurs, would send shockwaves through the $4 trillion municipal bond market.

During the nearly six hours of testimony, six attorneys for the bond insurers argued Michigan law dictates that funds raised from voter-approved bonds should be considered something of a “lien” and used only to pay off debt service for the bonds. Detroit’s attorneys, from the Jones Day law firm, argued federal bankruptcy law prescribes the funds are unsecured and that the bond issuers are like any other creditor.

Judge Rhodes, who said he would have a decision within two or three weeks, ended the day by urging continued mediation. “A decision here is most likely all or nothing,” he said. “One side is going to win and the other side is going to lose.”

Before the hearing, city attorneys told Judge Rhodes they had reached a deal with two global banks UBS and Bank of America Merrill Lynch for a “swaps settlement” on debt from pension funding. Rhodes has twice rejected previous deals, calling them too generous for the banks. City attorneys said they submit details to the court within three or four days.

The Detroit Free Press’s Nathan Bomey published this article, which is a comprehensive update of where bankruptcy dealings are to date.

And here are various other articles and stories published and broadcast about the day in court.

Attorney Caroline English today, representing Ambac Asssurance Corp., one of Detroit’s bond insurers, cited an 1888 case to bolster her argument that her client — and others — have a claim to funds raised through voter-approved measures.

That’s right, a 126-year-old case.

So during a break in the hearing, Next Chapter Detroit visited the library at the Theodore Levin U.S. Courthouse and found the case.

Titled “Moses Taggart, Attorney General, v. The City of Detroit,” the case involved ensuring the city used the taxes levied to pay for a public market for that purpose. Kind of like what the bond insurers are arguing: that the city should pay off general obligation bonds with taxes collected for that purpose.

The city’s bankruptcy filing and resulting legal tangles, mediation and early restructuring discussions have already had an impact on business practices, legal structures, general obligation bonds and public pensions, the Detroit Free Press reports today.

Reporter Nathan Bomey examines four ways Wall Street is changing because of Detroit’s dynamics. “Wall Street is quickly changing how it views municipal debt in the midst of the largest municipal bankruptcy in U.S. history,” he writes. Detroit “could uproot traditional financial principles about investing in public bonds, once thought to be rock-solid debt.”

In what could have been the “Bankruptcy Combined” event, a team of academics, researchers, lawyers and municipal finance experts broke down and analyzed some of Detroit’s bankruptcy issues in a Tuesday event that’s now available in on-demand replays.

If you’re a fan of privatization and data-driven decisionmaking, you’re a teammate of the presenters, drafted by the American Enterprise Institute in Washington D.C.

If you’re an unwavering union supporter or waving the flag of home rule, this team is going to raise your blood pressure.

Pensions, bonds, private-public partnerships, patterns of urban de-population and housing devaluation: All were explored in the two-hour session. Presenters reiterated the national implications of Detroit’s situation of declining population and revenue and lack of restructured services, operations and debt obligations.

“One reason it’s so important is because there area bunch of other cities that are in the same predicament,” says David Skeel, professor of corporate law at University of Pennsylvania and one of the presenters. To Skeel, it’s “pretty clear” the pensions will be restructured in Detroit’s post-bankruptcy plans.

The mere possibility that Detroit could default on municipal bonds defies history, according to John Mousseau, executive vice president and director of fixed income and a municipal bond portfolio manager at Cumberland Advisors in Sarasota, Fla. Less than one half of one percent of bonds have defaulted in the history of municipal markets, according to Mousseau. So the discussion about Detroit’s restructuring of its bond obligations means “we’re more or less in uncharted territory,” Mousseau says.

Other panelists were Michael Barone, senior political analyst for The Washington Examiner and a resident fellow at AEI, R. Richard Geddes, associate professor in the department of policy analysis and management at Cornell University, and Andrew Biggs, resident scholar at AEI.

To the plaintiffs challenging the constitutionality of emergency managers, the state law providing for such municipal oversight violates some basic principles of U.S. law: the First Amendment-guaranteed rights of free speech and the ability to petition the government.

Michigan’s Public Act 436, the law providing for emergency managers, also prevents the due process right for citizens to elect government officials and to enjoy equal protection under the law, according to a lawsuit re-filed in federal court Feb. 12.

“Public Act 436 unconstitutionally strips local voters of their right to a republican form of government by transferring governance, including but not limited to legislative powers, from local elected officials to one unelected emergency manager,” the suit reads. “In each of these communities, citizens will have effectively lost their right to vote for elected officials or had that right diluted so as to render it an exercise in form without substance.”

Originally filed 11 months ago, the suit is proceeding in U.S. District Court in Detroit. Attorneys re-filed the suit after a status conference last week with Judge George Caram Steeh, who ordered the suit could proceed. The plaintiffs removed claims that the EM law violates the right to collective bargaining. The suit does not directly challenge the city of Detroit’s bankruptcy proceedings.

The amended complaint includes 25 plaintiffs, many from the 11 Michigan communities with emergency managers helming municipal government or school districts. Some plaintiffs are members of Detroit’s library commission or school board and the Pontiac, Flint and Benton Harbor city councils. They name Gov. Rick Snyder and former state Treasurer Andy Dillon as defendants.

In part, the suit claims the Michigan Emergency Manager law “establishes a new form of local government, previously unknown within the United States or the State of Michigan, where the people within local municipalities may be governed by an unelected official who establishes local law by decree.”

One of the most provocative points of the suit is that 52 percent of Michigan’s African-American population lives in a city that has had an emergency manager or been under consent decree. WDET’s Detroit Journalism Cooperative partner Bridge Magazine explored this dynamic in a Jan. 22 article.

We’ll follow this dispute as it unfolds in U.S. District Court over the next several months.

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